Powell Analysis: Fed may cut rates in 2020, but the dollar moves to Trump's tune
|- Fed Chair Powell's prepared remarks are upbeat, but with a readiness to cut.
- Markets are more concerned about Trump's trade wars.
- The dollar may drop on Powell's words, but high volatility is saved for tariffs.
The central bank is ready to respond to a slowdown – or "material reassessment." That is the critical part from the prepared remarks that Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, has prepared for his testimony. The Fed is content with the current state of the US economy and with its policy – but is ready to cut interest rates once again. That may happen in 2020.
Powell has repeated the message he conveyed when the bank cut rates in late October and signaled a pause. The US dollar has edged lower in response – but the lack of novelty in his words has limited the market reaction.
What about raising rates? That seems to be off the table. Back in his post-rate decision press conference, Powell explained that only after inflation surpasses the 2% target – and sustainably so – will the Fed consider hiking. To conclude, a change to the outlook is sufficient for a cut, while only extensive evidence of inflation may trigger a hike.
Overall, the world's most powerful central bank is set to leave policy unchanged for some time – but is open to cutting rates.
Will that continue pressuring the dollar?
The quick answer is negative. The greenback – and the policy of the Fed – remain ahead of other major central banks which enact looser monetary policy. At this position, the Washington-based institution's mostly neutral stance is dollar-positive.
Moreover, and as mentioned earlier, Powell is not rocking the boat. However, President Donald Trump – just across the National Mall – may certainly trigger waves in markets. The president threatened China in a speech on Tuesday, disappointing investors that had hoped for an imminent accord.
Uncertainty related to international trade is weighing on manufacturing, investment, and growth. That tops the agenda for investors.
Next USD moves
If talks break up, these trends may continue, with the yen probably remaining the sole winner against the dollar while the euro and pound join the Aussie, kiwi, and loonie in losses.
And if the world's largest economies strike a deal, the greenback may find itself rising only against the Japanese currency and losing to the rest.
Trump remains the real game in town, with Powell on the sidelines – partly voluntarily and partly not.
More: Powell before Congress: Praising the economy and rebutting the President
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.